Chinese property market restrictions not working

As the London property market continues to grab the headlines in the UK, London real estate prices are relatively stable compared to the ever more volatile Chinese property market. Despite the fact that the Chinese authorities introduced an array of restrictions, prices continue to spiral higher. This buoyancy is not replicated in the Chinese economy which has shown signs of a slowdown in recent times.

First-time buyers fall by the wayside

While the headline figures suggest that property prices across China’s largest 70 cities increased by an average of 11%, this is not a true reflection. An increase of 11% is phenomenal in itself but some cities such as Hefei (up 47%) and Beijing (up 28%) are looking critically overstretched. Indeed if you ask estate agents across some of Beijing’s more sought-after areas they will tell you that in some cases prices have doubled over the last 12 months.

The fact that the chief economist at the People’s Bank of China described this as a “bubble” shows how desperate the situation is becoming in a country which does not openly discuss economic challenges. So, what does the future look like for real estate prices in China?

Chinese government accepting reality

Only a few months ago there were reports that the Chinese authorities were picking up unsold properties in some of the less sought after cities and towns. These were then been sold at a reduced price to the local population as a means of increasing activity in the real estate market and hopefully helping to support the local economy.

The 70 largest cities across China which dominate the real estate market headlines are in effect operating in a whole different marketplace to those outside the top 70. We only need to look at the London property market to get an idea how even internal markets can become detached from the overall national trend. It is the fact that the largest cities offer the best employment opportunities which creates focused demand pushing property prices to unsustainable levels.

Government advice on Chinese property

Even official economic advisers to the Chinese government are now advising those on lower incomes to be “more realistic”. This particular group of the population is now being pointed towards special flats and rooms in public housing which are more within their financial bracket. So while many workers moving to China’s largest cities do so dreaming of their own two/three-bedroom apartment many have already seen their dreams quashed.

The main problems going forward relate to the construction industry and the potential for a collapse as and when the property market “corrects itself”. It is also becoming obvious that many property investors across China are taking on levels of debt which they will struggle to service. The recent introduction of increased deposits and restrictions on who can buy property in particular cities and large towns may be too little too late.

A slowing economy, a property market within a property market (going in different directions) and growing debt do not bode well for the short to medium-term outlook for the Chinese property sector.